What it means
When incomes rise, people and firms buy more of everything, including goods made abroad. The marginal propensity to import (MPM) captures the extra imports triggered by an extra unit of income.
It is a marginal measure, meaning it looks at the change at the edge, rather than at total imports divided by total income. A high MPM is common in small, open economies that rely on imported fuel, machinery and consumer goods.
A lower MPM is typical of large economies with broad domestic industries. The figure is not fixed, and it moves with exchange rates, tariffs, the availability of local substitutes and consumer tastes.
The MPM matters because of the multiplier effect. When government or business spends an extra dollar, part is saved, part is taxed and part leaks abroad as imports, and only the remainder circulates again in the home economy.
The higher the MPM, the smaller the final increase in domestic income. For businesses, the measure helps in forecasting demand.
A stimulus package in an import-heavy country may boost overseas suppliers more than local producers, so the benefit to a domestic manufacturer may be smaller than the headline suggests. Exporters, on the other hand, can use the MPM of their customers' economies to estimate how sales respond to growth there.
The MPM should not be confused with the average propensity to import, which divides total imports by total income. The two can differ widely, and the marginal figure is the one used in multiplier calculations.
Policy makers try to influence it. Tariffs, import quotas and support for local industry can lower the MPM, while trade agreements and a strong currency tend to raise it by making foreign goods cheaper.
In practice
Real-world examples.
Example
A small island economy imports most of its fuel, food and cars. When tourism income rises, a large share of the new spending flows to foreign suppliers, so the MPM is high at around 0.5. A policy adviser warns that a tourism boom will help foreign suppliers almost as much as local workers.
Example
A government plans a public works stimulus and its economists estimate the MPM at 0.3. They warn that a significant part of the spending will leak abroad through imported machinery and materials. They suggest tying contracts to local suppliers.
Example
A machine tool exporter forecasts demand in a neighbouring country. Using that country's MPM, the company estimates how much of its customers' extra income will flow to imported equipment. It uses the result in its sales budget for the following year.
Formula
Calculation
MPM = Change in imports / Change in national income
Open economy multiplier = 1 / (Marginal propensity to save + Marginal propensity to import)
Suppose national income rises by $50,000,000 and imports rise by $10,000,000. The MPM is $10,000,000 / $50,000,000 = 0.2. If the marginal propensity to save is also 0.2 and there are no taxes, the multiplier is 1 / (0.2 + 0.2) = 2.5, compared with 1 / 0.2 = 5 in a closed economy. A government spending injection of $100,000,000 therefore raises income by $100,000,000 x 2.5 = $250,000,000, instead of $500,000,000.Case study
Seen in the real world.
Marisol Republic is an illustrative, fictional country with a small manufacturing base. Its treasury planned a $200,000,000 stimulus and assumed that incomes would rise by 5 times the amount, based on a savings rate of 20%.
A finance ministry analyst pointed out that the country imported about 30% of every extra dollar of spending. With the MPM included, the multiplier was 1 / (0.2 + 0.3) = 2, so the stimulus would add $400,000,000 to income, not $1,000,000,000.
In this illustrative story, the government redirected part of the spending to local suppliers and training programmes, reducing the leakage. The example shows why the import share matters when judging the effect of a stimulus. The ministry published both versions of the multiplier so that the assumptions could be debated openly.
Watch out
Common mistakes.
- Confusing the marginal propensity to import with the average propensity, when only the marginal figure is used in the multiplier.
- Treating the MPM as a constant, when exchange rates, tariffs and local supply can change it over a few years.
- Ignoring import leakage when forecasting the effect of government spending, which leads to forecasts of income growth that are too optimistic.
Questions
People also ask.
What does an MPM of 0.3 mean?
Out of every extra dollar of income, 30 cents is spent on imports.
Why does a high MPM reduce the multiplier?
Spending that goes on imports leaves the domestic economy, so there is less to be re-spent at home.
Which economies have a high MPM?
Small, open economies with limited local production of goods tend to have high MPM values, while large economies with diverse industries tend to have lower ones.
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